I keep hearing "analysts" say that certain company's stock is currently much below the fair value, and I also keep hearing that certain other stocks are severely over-valued. However, I have no idea how these analysts define fair value of a certain stock. Let us assume for now that we are not really looking at macro-economic factors, and we are simply looking at the company's balance sheet. Is there a nice formula to calculate fair value of a company's stock?
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asked Feb 11, 2021 at 14:09
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2$\begingroup$ The "fair value" of a stock, can be calculated using some sort of Discounted Cash Flow (DCF) model. You can take a look at the wiki page here. $\endgroup$– PlebFeb 11, 2021 at 14:18
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1$\begingroup$ Terms like "nice" or "best" don't seem very applicable to me, but: a stock analyst might guess what future earnings might be, and their reasonable ratio to stock price. Or likewise they might guess future dividends and derive a price of this guess. $\endgroup$– Dimitri VulisFeb 11, 2021 at 15:08
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1$\begingroup$ Shiller CAPE is one measure of FV and is well-documented online. A more interesting question than, "Is there a nice formula to calculate fair value of a company's stock" might be, "do FV estimates have any predictive power for returns". $\endgroup$– user42108Feb 11, 2021 at 19:16
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1 Answer
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- DCF analysis: future values of dividends discounted to today's dollars
- Comparable company analysis: relative value based on peer group ratios: P/E, P/sales, P/active_user, P/EV, P/TAM for SPACs or ventures
- Terminal value: total value of assets sold minus liabilities paid
For more details, see Company Valuation Methods by Pablo Fernandez
